Rates Reining in Aussie Seen Beating Kiwi Peashooter: Currencies

By Candice Zachariahs and Garfield Reynolds -
May 8, 2013

Australia’s interest-rate cuts will
prove more successful than New Zealand’s intervention in
foreign-exchange markets at curbing gains that made their
currencies the world’s best performers since 2008.

That’s the view of AllianceBernstein Holding LP, hedge
funds and other large speculators. Bullish bets on the so-called
Aussie fell by 69 percent from this year’s high in January,
while similar wagers on New Zealand’s “kiwi” more than doubled
since March, Commodity Futures Trading Commission data show.

Australia and New Zealand’s central banks are joining
policy makers from Zurich to Tel Aviv, Stockholm and Seoul in
seeking to stem the appreciation of their currencies.
Australia’s dollar has lost favor this month on speculation
Reserve Bank of Australia Governor Glenn Stevens, who lowered
rates this week to a record 2.75 percent, will continue to
reduce borrowing costs. Reserve Bank of New Zealand Governor
Graeme Wheeler is holding rates steady while selling the local
dollar.

“Every central bank is moving to cut rates but New
Zealand,” said Genzo Kimura, a Tokyo-based investor at Sumitomo
Mitsui Trust Asset Management Co., which oversees the equivalent
of $42.4 billion. “I’m thinking about buying the New Zealand
dollar. The governor said he doesn’t like the New Zealand dollar
being expensive, but he didn’t mention that he will cut the
rate.”

Jobs Growth

The Australian and New Zealand currencies pared this week’s
declines after separate reports today showed jobs growth surged
in the two nations.

New Zealand’s dollar climbed 0.7 percent to 84.63 U.S.
cents as of 12:10 p.m. in Sydney after government data showed
the nation’s unemployment rate dropped to 6.2 percent in the
first quarter from 6.8 percent in the prior period. The Aussie
jumped 0.7 percent to $1.0239 after the statistics bureau
reported the larger nation’s employers hired 50,100 workers in
April, more than four times the amount estimated by economists.

The kiwi currency appreciated as much as 3.8 percent in
seven weeks after Wheeler threatened to intervene on Feb. 20.
Wheeler said yesterday the central bank sold the local dollar
and can do so again. The RBNZ has held rates at a record low
since March 2011, even as house prices climb at the fastest pace
in five years.

The central bank publishes monthly figures for its net
currency sales that may or may not involve direct intervention,
which show it sold NZ$31 million ($26 million) in February and
March, and NZ$199 million in December. Its intervention capacity
was NZ$8.7 billion as of March 31, the data show.

Wheeler’s ‘Peashooter’

The Bank of Japan is spending about 10 times that amount
every month to buy bonds, a policy Governor Haruhiko Kuroda has
said can result in a weaker yen.

Finance Minister Bill English said in February his nation
wouldn’t join the so-called currency wars because it’s armed
with a “peashooter.”

The New Zealand dollar “probably has less immediate
pressure on it relative to the Australian dollar,” said Brad Gibson, a money manager in Melbourne with AllianceBernstein,
which oversees $443 billion. Australia’s policy makers are
thinking how to boost growth as mining slows, “whereas in New
Zealand, the central bank is worrying about the housing market
picking up. And both are worried about their currencies.”

Aussie Bears

Gibson has bearish positions on the Aussie, expecting it to
slide to 97 U.S. cents over six months, and doesn’t have any
active positions in New Zealand’s currency, he said.

The Australian and New Zealand dollars have declined 0.8
percent this week, the most among the Group of 10 advanced-nation currencies. The Aussie is down more than 3 percent from
this year’s high of $1.0599 on Jan. 10. New Zealand’s currency
reached as high as 84.82 U.S. cents today, rebounding from
yesterday’s 0.7 percent slide to 84.01. It reached a high for
the year of 86.76 cents on April 11. The kiwi, which was allowed
to freely trade in 1985, reached a post-float record of 88.43 in
August 2011.

The U.S. Federal Reserve, Bank of Japan, Bank of England
and European Central Bank are cutting rates to record lows and,
in some cases, flooding the global financial system with
trillions of dollars of cash by purchasing bonds in an effort to
boost growth.

The policies are leading investors to pour money into
economies such as Australia and New Zealand with higher yielding
assets, pushing up their currencies. Benchmark rates in those
nations compare with a range of zero to 0.5 percent in the U.S.,
Japan, U.K. and euro zone.

‘Currency War’

The New Zealand and Australian dollars have risen by about
45 percent versus the U.S. currency since 2008 and more than 50
percent against the euro and yen.

“It’s a currency war,” said Akira Takei, who helps
oversee the equivalent of $32 billion as head of the
international fixed-income department in Tokyo at Mizuho Asset
Management Co.

The flood of central bank money will probably support
riskier assets including the Australian dollar, said John Horner, a currency strategist in Sydney at Deutsche Bank AG, the
world’s top foreign-exchange trading firm.

“Given that we haven’t changed our terminal forecast for
the RBA at 2.5 percent by year-end and that’s fully priced in,
we see good support for the Aussie down at the low for the year
at $1.0120,” he said.

The kiwi will probably trade at 84 U.S. cents by year-end,
according to the median forecast of analysts compiled by
Bloomberg, up from an estimate of 82 cents predicted at the
start of the year. The outlook for the Aussie has fallen to
$1.03 from $1.04.

No Firepower

New Zealand’s dollar has appreciated more than 3 percent in
the past six months as investors focus on the central bank’s
inability to lower borrowing costs amid accelerating gains in
house values. Prices rose 6.5 percent in March from a year
earlier, the fastest annual pace since 2008, according to
Quotable Value New Zealand, a government-owned property
researcher.

“Everybody knows, including the finance minister, that
they don’t really have the firepower to have an impact on the
kiwi’s value,” said Sean Callow, a senior currency strategist
at Westpac Banking Corp. in Sydney. “The next move in rates is
up in New Zealand.”

Some central banks have had success intervening. The Swiss
National Bank has sold the franc to keep the currency from
appreciating beyond 1.20 per euro. The shekel dropped on May 6
by as much as 0.8 percent, the most in almost three months, as
the Bank of Israel bought U.S. dollars for the third time in a
week.

Sweden, Korea

Sweden’s Finance Minister Anders Borg warned May 7 the
krona’s strength is becoming a concern for the nation’s export-oriented economy and called on the central bank to take the
krona’s appreciation into consideration.

South Korea’s central bank unexpectedly cut its benchmark
rate to 2.5 percent today, after the government reiterated
yesterday it is monitoring the won.

Australia’s dollar has dropped 2.6 percent over the past
month according to Bloomberg Correlation Weighted Indexes amid
speculation the central bank will cut rates further as the
manufacturing, construction and services industries shrink at a
time when miners are forecast to reduce investments. New
Zealand’s declined 0.7 percent, the gauges show.

Rate Outlook

There’s a 76 percent chance Australia’s benchmark will be
2.25 percent by year-end, according to Bloomberg calculations
based on interbank cash-rate futures.

In New Zealand, traders see an 84 percent chance Wheeler
will keep rates unchanged this year, according to data on
overnight indexed swaps compiled by Bloomberg. There’s a 7
percent chance he will cut to 2.25 percent and a 9 percent
probability of an increase to 2.75 percent, the data show.

The cooling Australian economy and a record stretch for the
Aussie dollar above $1 is helping to cheapen imported goods and
damp inflation, with the slowest growth in core consumer prices
in 14 years last quarter.

“There are probably still more downside surprises to
Australian economic activity to come,” said AllianceBernstein’s
Gibson. Lower interest rates “would reduce the attractiveness
of the Australian dollar, and the nation’s high exposure to a
supply-led softening in commodity prices is also likely to weigh
on the currency,” he said.